Biggest hurdles for borrowers: Down payments or debt?

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The FHA 203k loan program provides home buyers the opportunity to buy and fix up a property, without exhausting their personal savings.

While lower down payment requirements may help pave a quicker path to homeownership for some prospective buyers, a bigger obstacle is the additional debt many borrowers bring to the table, according to Daren Blomquist, vice president at RealtyTrac.

The housing data provider recently analyzed affordability in more than 500 counties nationwide, looking at the impact of lowering the down payment for conventional loans (those that can be sold to Fannie Mae and Freddie Mac) from the traditional 20% to as low as 3%.

For borrowers without any additional debt, monthly house payments are affordable in more than 90% of U.S. housing markets — whether they make a 20% or 3% down payment. However, borrowers with non-mortgage debt, such as student loans and car payments, monthly house payments are affordable in less than half of U.S. housing markets with a 3% down payment.

Lower down payments and assistance programs will help with one major hurdle to homeownership, but many borrowers are unaware of the resources, according to Blomquist. Approximately 50% of young renters in Fannie Mae’s National Housing Survey released in May cited “affording the down payment and closing costs” as the biggest obstacle to buying a home.

Additionally, the Fed’s Report's "Economic Well-Being of U.S. Households", released in July, revealed that 45% of renters surveyed said they were renting because they can’t afford a down payment.

Across all markets analyzed, borrowers without debt would have to save up for at least 12.5 years to afford a 20% down payment at the current annual savings rate of 5.6% reported by the St. Louis Federal Reserve. It would take an average of less than two years to save up for a 3 percent down payment across all markets analyzed.

For borrowers without the additional debt of student loans and car payments, monthly house payments are still affordable in 92% of all county housing markets — even with just a 3% down payment, according to RealtyTrac.

However, borrowers with monthly average student loan debt ($280) and car payments ($400), putting just 3% down means mortgages are affordable in less than half (48%) of all county housing markets nationwide.

RealtyTrac found larger down payment could help borrowers with additional debt . With a down payment of 20%, more than three-fourths of county housing markets (78 %) are affordable in terms of monthly house payments for this group.

The affordability sweet spot really comes for borrowers with no additional debt who make a 20% down payment. Approximately 96% of county housing markets are affordable for this group of borrowers.